High Court Reverses Alabama Court's "Cramped Reading" of Interstate Commerce

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COMMENTARY BY DONALD LEE ROME

In a per curiam opinion in Citizens Bank v. Alafabco, Inc., No. 02-1295, dated June 2, 2003, the U.S. Supreme Court strongly endorsed a broad interpretation of the Federal Arbitration Act's "involving commerce" requirement. The opinion simultaneously granted certiorari, and without hearing argument on the issue, reversed a judgment of the Supreme Court of Alabama denying enforcement of an arbitration clause in a commercial loan restructuring agreement.

Alafabco, an Alabama construction company, claimed that Citizens Bank, an Alabama lender, had encouraged it to bid on a large construction contract in Courtland, Ala., but then refused to provide the capital necessary to complete the project. Using funds to complete the work that otherwise would have been used to repay existing obligations to Citizens as a result of many prior lending transactions with the bank, Alafabco became delinquent in its loan payments. This led to a restructuring of its debt with Citizens. The debt restructure agreement provided for arbitration, as did a prior debt restructure agreement with the bank.

Thereafter, Alafabco filed a lawsuit in Alabama state court against the bank and its officers, alleging numerous causes of action all arising out of the bank's refusal to provide capital to complete the Courtland project. Citizens moved to compel arbitration and the court granted the motion. However, the Alabama Supreme Court reversed. In its view, the narrow issue was whether the debt restructuring agreement between the two Alabama parties, by itself, had a "substantial effect on interstate commerce." If so, the Federal Arbitration Act would apply. But the court found that it did not because there was "no showing that any portion of the restructured debt was actually attributable to interstate transactions; that the funds comprising that debt originated out-of-state, or that the restructured debt was inseparable from any out-of-state projects."

The Supreme Court's short opinion agreeing to hear the case and overturning the state court's ruling without hearing argument is not surprising, given the facts of the case and prior Supreme Court pronouncements on the extent of Congress's Commerce Clause power. The Court itself cited three reasons for its ruling. First, Alafabco did business throughout the Southeast and had used loan proceeds to finance construction projects in at least three states. Second, the debt was secured by business assets involved in interstate commerce. Third, the transactions the parties entered into represented the "general practice" in commercial lending, an area subject to federal control. Reiterating its broad view of the FAA's application to transactions affecting commerce, the Court said, "Congress's Commerce Clause power 'may be exercised in individual cases without showing any specific effect upon interstate commerce' if the aggregate economic activity at issue would represent 'a general practice . …